Financial & Managerial Accounting
Financial & Managerial Accounting
18th Edition
ISBN: 9781259692406
Author: Jan Williams, Susan Haka, Mark S Bettner, Joseph V Carcello
Publisher: McGraw-Hill Education
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Chapter 24, Problem 6BP

a.

To determine

Compute the materials price variance and the materials quantity variance and also prepare journal entry to record the cost of direct materials used during March in the Work in Process account (at standard).

a.

Expert Solution
Check Mark

Explanation of Solution

Variance:

Variance refers to the difference level in the actual cost incurred and standard cost. The total cost variance is subdivided into separate cost variances; this cost variance indicates that the amount of variance that is attributable to specific casual factors.

Compute the materials price variance and the materials quantity variance:

Material price variance = Actual  quantity used ×(Standard priceActual price)=(7,000units×13ounces)×($0.20/oz$0.22/oz)=91,000 ounces×$0.02/oz=$1,820(Unfavorable)

Material quantity variance = Standard price×[Standard quantity Actual Quantity]=$0.20/oz[84,000 ounces91,000ounces]=$1,400(Unfavorable)

Therefore, the materials price and quantity variances of Incorporation M is ($1,820) and ($1,400).

Prepare journal entry to record the cost of direct materials used during March in the Work in Process account (at standard).

DateAccounts title and explanation

Debit

($)

Credit

($)

 Work in process inventory (1)16,800 
 Materials price variance1,820 
 Material quantity variance1,400 
      Direct materials inventory (2) 20,020
 (To record cost of direct materials used in March.)  

(Table 1)

  • Work in process inventory is an asset and there is an increase in the value of an asset. Hence, debit the work in process inventory by $16,800.
  • Materials price variance is an asset and there is an increase in the value of an asset. Hence, debit the materials price variance by $1,820.
  • Materials quantity variance is an asset and there is an increase in the value of an asset. Hence, debit the materials quantity variance by $1,400.
  • Direct materials inventory is an asset and there is a decrease in the value of an asset. Hence, credit the direct materials inventory by $20,020.

Working Notes:

Calculate the work in process inventory for direct materials:

Work in process inventory for direct materials }=Units actually  produced ×(Standard ounces used for direct materials × Standard per ounce usedfor direct materials)=7,000×(12/oz×$0.20/oz)=$16,800

(1)

Calculate the direct materials inventory:

Direct materials inventory=Units actually  produced ×(Actual ounces used to produce direct materials × Actual per ounce used to produce direct materials)=7,000×(13/oz×$0.22/oz)=$20,020

(2)

b.

To determine

Compute the labor rate variance and the labor efficiency variance and also prepare journal entry to record the cost of direct labor used during March in the Work in Process account (at standard).

b.

Expert Solution
Check Mark

Explanation of Solution

Compute the labor rate variance and the labor efficiency variance:

Labor rate variance = Actual hours ×(Standard hourly rate - Actual hourly rate)=(7,000units ×0.50 actual hours                    used for direct labor )×($12.00/hour$13.00/hour)=3,500×$1/ hour=$3,500 (Unfavorable)

Labor efficiency variance = Standard hourly rate ×(Standard hours - Actual hours)= $12.00/hour×([7,000 units ×0.6hours][7,000 units ×0.50hours])=$12.00/hour×700 hours=$8,400 (Favorable)

Therefore, the labor rate and efficiency variances of Incorporation M is ($3,500) and $8,400.

Prepare journal entry to record the cost of direct labor used during March in the Work in Process account (at standard).

DateAccounts title and explanation

Debit

($)

Credit

($)

 Work in process inventory (3)50,400 
 Labor rate variance3,400 
      Labor efficiency variance 8,400
      Direct Labor (4) 45,500
 (To record the cost of direct labor charged to production in March.)  

(Table 2)

  • Work in process inventory is an asset and there is an increase in the value of an asset. Hence, debit the work in process inventory by $50,400.
  • Labor rate variance is an asset and there is an increase in the value of an asset. Hence, debit the labor rate variance by $3,500.
  • Labor efficiency variance is an asset and there is a decrease in the value of an asset. Hence, credit the labor efficiency variance by $8,400.
  • Direct labor is an asset and there is a decrease in the value of an asset. Hence, credit the direct labor by $45,500.

Working notes:

Calculate the work in process inventory for direct labor cost:

Work in process inventory for direct labor }=Units actually  produced ×(Standard hours used  for direct materials × Standard rate per hours used for direct labor)=7,000×(0.6 hours×$12/ hr)=$50,400

(3)

Calculate the direct labor inventory:

Direct labor inventory=Units actually  produced ×(Actual hours usedfor direct labor× Actual per hours used for direct labor)=7,000×(0.50 hours ×$13.00/hr.)=$45,500

(4)

c.

To determine

Compute the overhead spending variance and the overhead volume variance and also prepare journal entry to assign overhead cost to production in March.

c.

Expert Solution
Check Mark

Explanation of Solution

Compute the overhead spending variance and the overhead volume variance

ParticularsAmount in $
Overhead budgeted for 7,000 units: 
     Fixed6,000
     Variable (7,000 units × $0.40 per unit)2,800
Total overhead per  flexible budget8,800
Less: Actual overhead in March ($6,000+$2,540)8,540
Overhead spending variance (favorable)260

 (Table 3)

ParticularsAmount
Overhead applied at standard cost ($1 ×7,000 units) $ 7,000
Less: Overhead per  flexible budget$8,800
Volume variance (unfavorable) $ (1,800)

(Table 4)

Therefore, the manufacturing overhead spending and volume variances of Incorporation M are $260 and ($1,800).

Prepare journal entry to assign overhead cost to production in March.

DateAccounts title and explanation

Debit

($)

Credit

($)

 Work in process inventory (5)7,000 
 Overhead  spending variance1,800 
 Overhead volume variance 260
      Manufacturing Overhead (6) 8,540
 (To apply overhead cost of to 7,000 units produced at  standard rate of $1 per unit)  

(Table 5)

  • Work in process inventory is an asset and there is an increase in the value of an asset. Hence, debit the work in process inventory by $7,000.
  • Overhead spending variance (Expense) is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the overhead spending variance by $1,800.
  • Overhead volume variance (Expense) is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the volume variance by $260.
  • Manufacturing overhead (Expense) is a component of stockholder’s equity and there is a decrease in the value of expense. Hence, credit the manufacturing expense by $8,540.

Working notes:

Calculate the work in process inventory for overhead:

Work in process inventory for manufacturing overhead}=Units actually  produced ×(Standard rate per hours used for manufacturing overhead )=7,000× $1 per unit=$7,000

(5)

Calculate the direct labor inventory:

Manufacturing overhead inventory=(Actual fixed cost of manufacturing overhead+Actual variable cost of manufacturing overhead)=$6,000+$2,540=$8,540

(6)

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Chapter 24 Solutions

Financial & Managerial Accounting

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What is variance analysis?; Author: Corporate finance institute;https://www.youtube.com/watch?v=SMTa1lZu7Qw;License: Standard YouTube License, CC-BY